Tuesday, May 7, 2013

The Europa League has long been regarded by leading clubs as
a poor relation to the far more lucrative Champions League, but Chelsea’s
prodigious efforts after parachuting in to the junior competition might just
give pause for thought, as they will end up earning more from Europe this
season than any other English club.

Although they earned €5 million less than Manchester United
from the Champions League after exiting at the group stage, they will receive
at least €6.5 million from the Europa League, even if they lose the final. If
they repeat last season’s victory in the Champions League, the sum earned will
rise to around €9 million.

This means that Chelsea will receive at least €40.9 million
(Champions League €34.4 million + Europa League €6.5 million), rising to as
much as €43.4 million if they win the Europa League. Of course, the bad news is
that this will still be significantly less than last season’s €59.9 million for
the Champions League triumph - though the blow will be somewhat softened by money from the UEFA Super Cup (€2.2 million) and the FIFA Club World Cup ($4 million).

The other three English Champions League qualifiers should
still be smiling though, as they have all actually earned more money this season,
thanks to a substantial increase in the available prize money (around 22%).

Manchester United’s income rose €4.1 million to €39.3
million, though the difference falls to €2.9 million once the €1.2 million they
received from dropping down to the Europa League in 2011/12 is taken into
consideration. Similarly, Manchester City’s income increased by €5.8 million to
€32.4 million, reducing to €4.6 million after deducting last season’s €1.2
million from the Europa League. Finally, Arsenal will receive €34.5 million,
which is €6.2 million higher than the previous season.

As an aide-mémoire, the money for UEFA’s two tournament is divided
into two parts: (a) prize money based on participation and results; (b) TV
(market) pool.

Prize Money – Champions League

Each of the 32 teams that qualify for the Champions League
group stages is guaranteed a participation base fee of €8.6 million even if it
loses every single game. There is also a performance bonus of €1 million for
each victory in the group stage plus €500,000 for a draw. So if a team manages
to win all six of its group matches, it will get €6 million on top of the base
fee.

If a team qualifies for the first knock-out round (the last
16), it is awarded a further €3.5 million, while there are additional performance
prizes for each further stage reached: quarter-final €3.9 million, semi-final
€4.9 million, final €6.5 million and winners €10.5 million. So if you go all
the way and win the trophy, you would earn a total of €37.4 million (not
counting the TV pool share), which is up from €31.5 million in 2011/12.

Prize Money – Europe League

The principle is the same in the Europa League, though the
sums involved are much smaller. Each of the 48 clubs involved in the group
stages receives a participation base fee of €1.3 million. In addition, there is
€200,000 for each win and €100,000 for each draw in the group stage. A new
addition this season, presumably to encourage clubs to give their all, is qualification
bonuses for teams that progress to the round of 32: group winners earn €400,000
and runners-up €200,000.

Turning to the knock-out stages, clubs competing in the
round of 32 will receive €200,000 each, clubs in the last 16 €350,000, the
quarter-finalists €450,000 and the semi-finalists €1 million. The Europa League
winners will collect €5 million and the runners-up €2.5 million.

That’s now a pretty good incentive, compared to the €3
million paid to Atlético Madrid, the 2011/12 winners. In fact, the winning club
could now receive a maximum of €9.9 million, 54% up from last season’s €6.4
million.

Although the Europa League’s 2012/13 prize money is higher
as a proportion of the Champions League (26% v 20%), the gap between the two is
actually growing (€27.5 million v €25.1 million).

Nevertheless, it can still be a very useful boost to clubs
like Chelsea that drop down from the Champions League, especially if they reach
the final, which is worth either €6.5 million or €9 million (assuming €2
million for the Europea League TV pool, based on previous years). It does
require Stakhanovite efforts on behalf of the playing squad, which may
jeopardise their chances in their domestic league, but, as the figures above
indicate, it can make a big difference.

TV Pool

In addition to these fixed sums, the clubs receive a share
of the television money from the TV (market) pool, which is allocated according
to a number of variables. First, the total amount available in the pool depends
on the size/value of a country’s TV market, so the amount allocated to teams in
England is more than that given to, say, Spain, as English television generates
more revenue. Clubs can also potentially do better if fewer representatives
from their country reach the group stage, as the available money is divided
between fewer clubs.

In the case of the English clubs in the Champions League,
the allocation works as follows:

(a) Half depends on the position that the club finished in
the previous season’s Premier League with the team finishing first receiving
40%, the team finishing second 30%, third 20% and fourth 10%.

(b) Half depends on the progress in the current season’s
Champions League, which is based on the number of games played, starting from
the group stages.

However, the 2012/13 allocation for the element based on the
previous season’s Premier League finish was changed following Chelsea’s
Champions League win as follows: Manchester City (1st) 30%, Manchester United
(2nd) 25%, Arsenal (3rd) 15%, Chelsea (5th) 30%. So, the first three clubs lost
a portion of their TV pool following Chelsea’s remarkable success.

TV Pool – Allocation

The TV pool allocation methodology can produce some results
which seem strange at first glance, e.g. Manchester United and Arsenal were
both eliminated at the last 16 stage, but United received €4.3 million more than
Arsenal (€23.2 million v €18.9 million).

This is entirely due to United finishing one place ahead of
Arsenal in the 2011/12 Premier League, so receiving 25% of that half of the TV
pool (€10.8 million), compared to Arsenal’s 15% (€6.5 million). Of course, both
clubs received exactly the same (€12.4 million) for this season’s Champions
League progress, which incidentally was more than the €9.3 million for Chelsea
and Manchester City, who both went out at the group stage.

Thus, from a purely financial perspective, it is important
not just to qualify for the Champions League, but also to qualify in as high a
position as possible. Fourth place may be considered a trophy these days, but
second or third place are worth even more to the bank balance.

A club’s finances are also boosted if the club finishing
fourth fails to win the qualifier for the group stage, as this would mean that
the TV pool would then be split between only three teams instead of four. In
the same way, it is better financially if the other English clubs do not
progress as far as your team.Note that these calculations assume that the total English TV pool is the same as last season, based on the Sky/ITV deal being more or less the same size, though there are some indications that it might be slightly lower.

However the money is split, there is no doubt that all the
English clubs playing in the Champions League have a considerable monetary
advantage over the rest of the Premier League, as can be seen by the above
analysis of Media revenue from last season – and that was before the 2012/13
increases. As The Clash once sang, it is indeed a “Safe European Home”, at
least for a privileged few.

Friday, May 3, 2013

The week after they clinched the Premier League title,
Manchester United announced record third quarter turnover of £91.7 million,
more than 13 clubs in England’s top flight achieved in the whole of the 2011/12
season. To further place United’s incredible ability to generate revenue into
context, this quarterly result was about the same as Newcastle United’s revenue
last season – and Newcastle have the seventh highest revenue in England.

Revenue was up 30% with all categories posting impressive
growth: commercial 32% to £36.0 million, match day 28% to £34.0 million and
broadcasting 28% to £21.7 million.

Match day revenue growth is due to the club staging three
additional home matches in this quarter compared to the prior year quarter:
four more FA Cup ties, offset by a one game reduction in European matches (one
Champions League match less two Europa League matches).

Broadcasting revenue growth is largely due to United
progressing to the Champions League round of 16, as opposed to exiting at the
group stage the previous year.

However, it is the 32% commercial growth that is most
impressive, driven by the addition of several new sponsorship deals. In fact,
sponsorship revenue is up a cool 52% to £21.0 million, while retail &
merchandising grew 10% to £9.2 million and new media and mobile rose 14% to
£5.8 million. At this rate, United’s commercial revenue for the whole year
could be around the same level as Real Madrid and Barcelona (around £150
million).

These figures include some money for the new Chevrolet shirt
sponsorship deal, even though this does not fully kick in until the 2014/15
season, when it will be worth an astonishing £45 million ($70 million) compared
to Aon’s current £20 million. However, United somehow negotiated for Chevrolet
to pay them £11 million in each of the previous two seasons – while Aon are
still the incumbent shirt sponsors. Amazing stuff.

Furthermore, the latest results do not include the new deal
signed with Aon last month for the naming rights to the club’s Carrington
training centre and sponsorship of the training kit and overseas tours. The
club has not divulged how much this deal is worth with press estimates varying
between £120 million and £180 million for the eight-year agreement, but it will
certainly represent a significant uplift to the DHL £10 million training kit
deal.

In addition, more money can be expected when the kit
supplier deal is renegotiated for the 2014/15 season. Nike currently pay £25.4
million a season, but any replacement deal will generate considerably more with
some analysts believing that this sum might double.

It’s not all good news in these figures, as wages have again
grown by an unexpectedly high 25% to £44.9 million following expensive arrivals
in the summer (including Robin van Persie from Arsenal and Shinji Kagawa from
Borussia Dortmund), renegotiated contracts for existing players and growth in
United’s commercial team. That said, the important wages to turnover ratio
actually fell 2% to 49%

Similarly, other operating expenses rose a hefty 50% to
£21.8 million, primarily due to the costs involved in staging the additional
home games.

Once again, United’s profits were hit by net interest
payable, which increased £14.8 million to £18.3 million, even though gross debt
was £56 million lower than this time last year at £368 million. The increase
was largely due to £15.7 million of adverse exchange rate movements after
translating the US dollar denominated senior secured notes into Sterling. It
should be noted that this is an unrealised FX loss that has no cash impact
until the secured notes mature in 2017.

In fact, the interest payable is enough to produce a small
£3.6 million pre-tax loss (compared to £2.8 million profit last year), though
this becomes a £3.6 million post-tax profit after booking £6.7 million of
non-cash tax credits (reflecting a lower effective tax rate).

Of course, one swallow does not make a summer and we should
not attempt to draw too many conclusions from one quarter in isolation. If we
look at the first nine months of the 2012/13 season, revenue of £278 million is
13% up on the same period for the prior year. That’s still very impressive, but
not as much as Q3’s 30%.

In much the same way, wages have grown “only” 15% to £129
million, leading to a very good wages to turnover ratio of 47% for the period.

Nevertheless, profit before tax rose 22% to a very healthy
£19.2 million (up from £15.7 million in 2011/12) with profit after tax even
higher at £40.3 million, thanks to £21 million of tax credits. This could be a
factor for a while in United’s figures, as the Q2 statement referred to £60
million of unrecognised deferred tax assets being available (of which £6.7
million was used in Q3).

All football clubs are affected by the seasonality of
revenue, especially the phasing of matches, which not only affects gate
receipts, but also TV money (in terms of Premier League merit payments and
European distributions). This means that traditionally most revenue is
recognised in Q2 and Q3.

United have said that they expect total 2012/13 revenue to
be between £350 million and £360 million. Taking the mid-point of £355 million
would imply Q4 revenue of £76.9 million, only £2.4 million higher than Q3 last
season. That would mean a £35 million (11%) increase over the £320 million
reported for 2011/12.

After that growth, United would remain the club with the
third highest revenue in the world, though the gap to Real Madrid and Barcelona
would reduce (based on the Spanish clubs’ budgets). In 2011/12 United were £71
million behind Barcelona in second place with £391 million, but the difference
would be only £25 million at current exchange rates. In fact, the real gap
would be even smaller, but for the weakening of the Pound, which has boosted
overseas clubs’ revenue in Sterling terms.

If we annualise United’s nine month wages of £129 million,
that implies an annual wage bill of £173 million, which would be around the
same level as Chelsea’s 2011/12 figure and is around £20 million more than
Arsenal’s estimate of £150-155 million. Of course, the calculation is not quite
that simple (e.g. if we were to annualize Q3 alone, that would give £180
million), but it’s an interesting indication of the continuing wage inflation
facing Manchester United.

The good news is that gross debt continues to fall, down
from £437 million in June 2012 to £368 million in Q3 following the repurchase
of £63 million of bonds. In fact, gross debt has been greatly reduced since the
£773 million peak in 2010 with the hideously expensive PIKs now repaid. That
said, United’s debt is still far higher than any other club in the Premier
League with the next highest being Arsenal at £246 million.

United again demonstrated their ability to generate vast
amounts of cash from their football operations with £57 million, spending a net
£33 million on players (£41 million player purchases less £8 million sales),
£11 million on infrastructure (property and equipment) and £2.7 million to
complete the purchase of the club’s own TV channel, MUTV.

However, they also shelled out £46 million in interest
payments and used the £69 million net proceeds from the IPO to fund £67 million
of debt repayment. In the whole of 2011/12 United paid out £46 million in net
interest, which was about the same as all other Premier League clubs combined.

So, this is a very good set of figures from Manchester
United with even more growth to come, both from the seemingly never-ending
stream of new sponsors and the blockbuster Premier League TV deal, which should be
worth at least another £30 million. Indeed, Ed Woodward, the executive
vice-chairman who will succeed David Gill as chief executive in July, said that
the club still had plenty of untapped markets where they could sign sponsorship
deals: “The opportunity remains huge.”

Wages growth is cause for some concern, though this will not
be a major issue if revenue continues to grow apace. Moreover, under the
Premier League Financial Fair Play (FFP) regulations, clubs with wage bills
above £52 million will only be allowed to increase their wages by £4 million
per season for the next three years. That said, the restriction only applies to
TV money, so clubs are free to spend any additional income from ticket sales or
commercial deals on wage growth. This caveat gives United plenty of flexibility
with their demonstrable talent for increasing commercial income.

The one major irritant for United fans remains the high debt
incurred as a result of the Glazers’ takeover, resulting in another £46 million
leaving the club in the form of loan interest in the first nine months of
2012/13. Whatever praise the owners receive for their commercial acumen, there
is no doubt that this money could be better used elsewhere. As the late, great
Ian Dury once said, “What a Waste”.

Praise for The Swiss Ramble

"Blogger of the Year 2013 - It’s testament to the effect that Kieron has had on the blogosphere that so many fans take his word as gospel. Putting to use his career in the world of finance, his insights into balance sheets and simple explanations of complex ideas appeal to the hardcore financial whizz and casual fan alike." - The Football Supporters' Federation